Main termination issues affecting a Partnership Agreement

What are the main termination issues to be considered in a Partnership Agreement?

The main termination issues to be considered are:

Duration:

The Partnership Act 1890 provides that unless agreed to the contrary, any partner can terminate the partnership at any time by giving notice to the others. This notice will take effect immediately and does not have to be in writing. This means that a partnership can seem very insecure and uncertain if a particular duration for it is not agreed on.

There are a number of ways of giving a partnership more security. Firstly, you can put a clause in the agreement stating that a partner must give a set period of notice before ending the partnership. A period of 6 months or more, for example, would allow the partnership time to find a new partner. Alternatively, you can agree that the partnership is to last for a fixed term during which it cannot be ended by one of the partners. Once the period has ended it could then continue on the same terms, but could be terminated by a partner giving a period of notice. Lastly, you could provide that the partnership is to continue for as long as there are at least two partners in the firm. This would allow partners to leave without requiring the business to end.

You should also consider the possibility of a partner dying or becoming bankrupt. The Partnership Act says that if this happens then the partnership will end. It is worthwhile, therefore, to consider a clause that the partnership will continue in this situation, as long as the other partners can pay for the deceased's or bankrupt's share of the business.

Expulsion:

In certain circumstances, the partners in a business may feel it necessary to expel a particular partner. This may be because he/she has broken the partnership agreement, for example, by not devoting enough time to the business. If this issue is not addressed in the partnership agreement, then the law says that the only way to expel a partner is to dissolve the business.

An agreement should, therefore, set out in what circumstances a partner can be expelled, how the decision to expel is to be made (majority vote or all remaining partners in favour) and state that the partnership is to continue without him/her. You will also have to deal with payment of the expelled partner’s share of the business.

Paying for an outgoing partners share:

When a partner leaves a business whether through death, expulsion or retirement and that business is to continue, the outgoing partner must receive payment from the others for his/her share. The terms of this payment should, therefore, be agreed in advance.

It is important to consider:

Whether the other partners have to buy the other partners' share or whether it is an option to buy.

When the partner is to receive payment, immediately, after a set period of time or by instalments?

How the share of the business is to be valued, by a named professional or by an agreed formula by the partners?

Restrictive Covenants:

An outgoing partner will be free to set up a competing business or to work for a competitor unless a restraint of trade clause is inserted into an agreement. In order to be legal, such a clause must seek to protect a legitimate interest. This is normally the firm's business links and confidential information.

Be reasonable in terms of duration and geographical area. If the clause is unnecessarily restrictive and would deprive an outgoing partner of a living for a lengthy period, then it will not be enforceable. The area must not be very wide, for example, it should be limited to the area in which the firm actually did business and not prevent a former partner from working elsewhere. It must also be limited to the kind of business that the partnership operated in, for example, it cannot prevent a former partner from finding employment in a different trade. Anything longer than 12 months may also prove quite difficult to enforce.

If the partnership is likely to prove quite complicated or there are substantial amounts of money or assets involved, you should seek advice from a solicitor. The above information will however help you consider the most important issues.